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Ready to grow

Released on:2021-04-09 Views:


The African Continental Free Trade Area (AfCFTA) started operations this year, promising grand opportunities and great cooperation potential for China and Africa in both service and agri-processing industries. The continent has registered moderate growth for many years, and its commerce, tourism, and finance are likely to become key open sectors. More specifically, the opening of Africa's fiance service can be aligned with RMB internationalization. China-Africa cooperation in agri-processing can strengthen food security, upgrade the value chains and create more business opportunities.


Author: Ma Hanzhi

Assistant Researcher, Department of Developing Countries Studies, China Institute of International Studies

In 2020, the novel coronavirus outbreak has further exacerbated Africa's slow growth and high debt dilemma, pushing the region into its first recession in 25 years. Given Africa's economic vulnerability and over-reliance on the external environment, the economic fallout of the COVID-19 pandemic will be much worse than that of the 2008 global financial crisis and the plunge in commodity prices in 2014.

Trading under the AfCFTA started on January 1, a big step toward boosting economic recovery and structural transformation on the continent. In this context, Africa's service and agri-processing industries enjoy great development opportunities, which bodes well for China-Africa cooperation in these two areas and the building of the China-Africa community with a shared future.

Picture source: China Daily

//Steady growth in service sector//

Over the past few years, Africa has witnessed appreciable growth in the services sector, with a record growth of 9.4 percent in services exports in 2018. The continent's imports in the services sector reached USD 180 billion in 2019, and its exports reached USD 122 billion. Although the share of African services trade in the global services trade is still low, many African countries are witnessing a notable rise in the proportion of services exports in their total exports, such as Ethiopia, Mauritius, Kenya, Morocco and Uganda. Service industry accounts for more than 40% of exports on average; while exports of tourism and transport services account for more than 10% of GDP of Mauritius and Morocco.

The booming services have become one of the major driving forces for many African countries, partly addressing the lingering challenges posed by the single-product economy and creating jobs for the younger generation, improving gender equality and enhancing export diversity.

In 2020, the rampage of the pandemic has caused a plunge in the world's service trade. In this context,  Africa's trade sector underperformed with the EU and US, its major importers' demand dipping. However, as the world's economy embraces recovery growth and various relief or stimulus plans start to work out,  the continent's economy, in particular foreign trade, is expecting a rebound in 2021.

Picture Source: Xinhua News Agency

//More opening-up and facilitation//

With the first-phase negotiations on the services trade under the AfCFTA completed, infrastructure, commercial services, tourism, banking and insurance are set to become the key areas for opening-up. By this token, promoting the services sectors such as accounting, financial services, telecommunication and transportation, will facilitate trade and support a thriving manufacturing sector. In addition, improving the labor productivity and credit level of the private sector is the basis for making better use of preferential trade arrangements in the AfCFTA.

For example, in Nigeria, one of the largest economies in Africa, funding provided by domestic commercial banks and other financial institutions to the private sector only accounts for 15.6 percent of the country's GDP, much lower than that in developed countries. To support the development of private businesses, African countries should also prioritize the development of financial services to let the financial sector better serve the real economy. Recently, the Central Bank of Nigeria has recently carried out strict policies to channel funds to the real economy and raise the threshold of the loan-to-deposit ratio to 65 percent by limiting the ability of banks to convert customer deposits into high-yield government securities.

With the rolling out of the AfCFTA, financial services are expected to thrive, and the development of regional financial infrastructure will boost trans-border trade and investment.

Picture source: China Daily

//A new approach to RMB internationalization//

As an important industrial sector, service industry is an important area for China-Africa cooperation. For example, the financial service industry is listed as one of the 10 cooperation plans pledged at the 2015 Forum on China-Africa Cooperation (FOCAC). According to the plan, China will expand its renminbi settlement and currency swap operations with African countries, encourage Chinese financial institutions to set up more branches in Africa, and increase its investment and financing cooperation with Africa in multiple ways to provide financial support and services for Africa's industrialization and modernization drive.

The development of AfCFTA has further highlighted the contradiction between financial supply and demand in African financial services, without the integration of which, there would be no establishment of a unified African market. As the next step, China could provide support to the Pan-African Payment and Settlement System (PAPSS), which will enable each African country to use its own currency in transactions and release Africa from the traditional reliance on the US dollar in trade payments.

In addition, China should encourage African countries and African financial institutions with relatively high credit ratings to issue renminbi-denominated bonds in China and encourage eligible Chinese financial institutions to issue renminbi-denominated or foreign currency-denominated bonds in Africa. The financing obtained by Chinese enterprises issuing bonds in Africa can be encouraged to be used in the related infrastructure construction of AfCFTA.


Picture source: China Daily

/ / New opportunities for agricultural industrialization / /

At the same time, the agri-processing industry has huge potential in Africa. Statistics show that agriculture contributes 17.23 percent to Africa's GDP and accounts for 38.5 percent of the jobs on the continent. It is the sector that absorbs the most employment in Africa. However, due to lack of development funds and the low level of agricultural modernization, it remains a backward sector of the African economy with an average output per farmer 50-80 percent lower than anywhere else in the world. Due to the limitation of storage, processing and logistics, nearly 50% of Africa's grain is lost after delivery. In 2019, Africa's grain imports amounted to USD 90 billion.

As the AfCFTA presses ahead, the rich agricultural resources and broad market prospects in Africa may forge deeper cooperation with the international community in food production, warehousing, transportation and other agricultural links.

The implementation of the AfCFTA will create new growth opportunities for Africa's agribusinesses. Although intra-Africa trade has increased over the past decade, it only accounts for 27 percent of Africa's total exports of agricultural products and 17 percent of Africa's total imports of agricultural products. Arancha González, who served as executive director of the International Trade Centre from 2013 to 2020, said the launch of the AfCFTA will boost the agri-processing industry in Africa by turning the continent's plentiful agricultural raw materials into processed products. For instance, the AfCFTA will increase the value added of Africa's traditional exports such as cocoa, coffee and tea by helping local agri-processing businesses move up the value chain. A unified market will also create new opportunities for the exports of non-traditional agricultural products such as gardening products.

Picture source: China Daily

//Reducing reliance on external food supply//

The COVID-19 pandemic and the economic challenges associated with it have coalesced into an African food crisis, pushing the continent to reduce its reliance on external suppliers and turn to closer local suppliers. This is helpful for the development of intra-African value chains. After the outbreak, Asian countries and Russia gave priority to ensuring their own grain reserves and restricted their exports, which brought risks to Africa.

According to a report released by the Southern African Development Community, 45 million people across southern Africa face severe food shortages in 2020, among which 8.4 million children face severe malnutrition affected by extreme weather and the COVID-19 epidemic. According to Josefa Leonel Correia Sacko, Commissioner for rural economy and agriculture of the African Union Commission, Africa should fully exploit its agricultural resources- the continent has roughly 60 percent of the global total- and enhance intra-African trade within the framework of the AfCFTA, so as to meet food needs of 1.3 billion Africans. Against the background of multiple uncertainties such as epidemic raging, "achieving self-sufficiency" is the fundamental way out.

Supporting Africa's agricultural modernization is a significant part of China-Africa cooperation. Against the backdrop of the pandemic and the implementation of the AfCFTA, China will strengthen agricultural cooperation with Africa and help Africa strengthen its capabilities to ensure food security. Chinese businesses will double down their investments in Africa's agricultural sector to help the continent strengthen its agricultural sector and improve the regional and global competitiveness of African agricultural products.

Picture source: China Daily


Author: Ma Hanzhi

Source: China Watch